Understanding The Process of Dissolving a Homeowners' Association

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Introduction:

Throughout the United States, there are numerous Homeowners’ Associations that have been set up to provide for the common maintenance of various planned real estate communities.  The intent behind homeowners’ associations is to ensure that the property values of the community members are protected by enactment of Covenants, Conditions, and Restrictions (CC&Rs) that apply to all property owners and also to provide for common maintenance and other items that are necessary to ensure that a planned community runs on an efficient and effective basis.  While generally homeowners’ associations are provided for the common good of its residents, what happens when it becomes necessary to dissolve an HOA? There are many reasons that it may become necessary to dissolve a homeowners’ association.  They could be financial or legal or a combination of the two.  For example, association members could make a move to dissolve the HOA because of concerns that the Board is spending funds at too extravagant of a level, perhaps there is negligence in failing to maintain common areas or other buildings, security has been conducted on an inadequate basis, or the association’s failure to properly enforce the CC&Rs.  Another key reason may include the association members’ failure to pay dues as required. This lack of payment often results in the HOA simply not being able to meet its obligations to perform maintenance and other items because it does not have the financial ability to do so.  In some parts of the country, when the real estate market has taken a hit and foreclosures have been at a high level, often homeowners associations have been forced to dissolve because of extreme financial difficulties. This article is designed to provide general guidance as to what processes are required in order to legally dissolve a Community Association or HOA in the unfortunate event that such action becomes necessary.

What is the legal process required to dissolve an HOA or Community Association?

In general, members of HOAs should view dissolution of the entity as a last ditch effort.  This is to say that it is very important to look at other ways to resolve differences within the community before deciding to try to dissolve it.  Much like married couples contemplating divorce might consider counseling or mediation prior to engaging in attempts to dissolve the homeowners’ association, common sense tells us that it is best to try to resolve differences through other available channels first before engaging in such a drastic remedy.  With that said, sometimes though, despite everyone’s best efforts, dissolution of the HOA may be the only viable option based upon the facts of the situation.

The legal procedure for dissolving an HOA will vary based upon differences in state law. In addition, the process can also vary based upon the governing documents of the homeowners’ association.  For example, the entity’s Bylaws or CC&Rs may provide a process for dissolving the entity.  Thus, before engaging in an attempt to dissolve an HOA or Community Association, it is critical to understand what legal requirements are in place before embarking on such a path.

The Association’s Governing Documents will determine the process for dissolution:

As mentioned above, in general, the process of dissolving an HOA is governed by the organizing documents of the homeowners’ association, including the Articles of Incorporation, Bylaws and CC&Rs.  State laws will vary on some points related to this issue so it is important to know what your state law provides for.  In addition, some states like Alaska, Colorado, Connecticut, Minnesota, Nevada, Vermont, West Virginia, and Washington State have enacted laws such as the Uniform Common Interest Ownership Act (UCIOA) governing the formation, management, and termination of homeowners’ associations, or the Uniform Planned Community Act which also place strict legal requirements on most aspects of HOAs. 

80 Percent Rule:

In many jurisdictions, depending on applicable state law, the standard rule is that 80 percent of the members of the homeowners’ association must vote in favor of dissolving the HOA or Community Association.  This is typically the case unless the HOA documents state otherwise or provide for a different rule.  Some association documents might allow dissolution with a simple majority or a 60 percent approval.  It is important to think of dissolution as a drastic remedy and putting such an item up to a vote, if there is not substantial support for dissolution, might be a mistake that leads to further controversy within the community if dissolution does not occur.

In some states, associations are also treated as nonprofit corporations and associations which may have even a different set of requirements.  For this reason, it may be necessary for either the Board of Directors of the HOA or the Members seeking dissolution to obtain legal advice prior to proceeding.  This is also true with regard to procedural requirements, such as how notice of the vote concerning dissolution must be communicated, how much notice is required and what the reasons are that dissolution is authorized.

Once the process of placing a vote for dissolution on the ballot has properly been completed, a vote will be taken by the method or methods provided in the association’s governing documents or state law. If the vote for dissolution passes, then there are also a series of legal requirements which must be met in order to finalize the process of dissolving the entity.  In addition, if the association’s internal documents provide a series of steps or processes that must be followed to carry out the dissolution, those must also be followed in the course of dissolving the entity.

Finalizing the Dissolution:

As mentioned above, the vote approving dissolution by the members of the HOA is only one of the steps in the process of dissolving an HOA or Community Association.  In general, a filing with the Secretary of State is generally required to show the legal formality of the dissolution.  This may be referred to as “Articles of Dissolution” or a similar document.  It is also required that the homeowners’ association will have to resolve or settle any outstanding debts and dispose of available assets as the case may be.  This process will also vary depending on applicable state law. Consideration also needs to be given to any rights of third parties with whom the HOA or Community Association has contracted to be sure those matters are addressed.  For example, contracts for snow removal, mortgages if the association borrowed money for improvements to community property or common areas within the development.  This can be relatively complex especially if there are mortgages attached to association property as those will need to either be paid off or refinanced as otherwise, those obligations will remain attached to the real estate regardless of the fact that the homeowners’ association has dissolved. 

In summary, before the dissolution of the HOA or Community Association can truly be finalized, all business of the homeowners’ association must be wrapped up and properly dealt with.  This process can also be time consuming and difficult depending on the circumstances of the dissolution and the state in which the association is located in.

What happens after the HOA or Community Association is Dissolved?

After the legal process for dissolution has been completed and the affairs of the HOA have been wound up as discussed above, what additional steps are required?  There may be real estate title work that will need to be completed to finalize the process.  For example, common areas of the HOA property must generally be conveyed to another legal entity when the HOA is dissolved or divided among the individual homeowners.  It may be possible to locate an investor who is interested in taking over maintenance responsibilities and thus sometimes a third party will purchase such portions of the real estate.

Depending on the governing documents of the association and state law, typically it will be required that a document verifying the dissolution of the homeowners’ association be filed in the real estate records of the particular property.  This can be the equivalent of the revocation of the CC&Rs or Deed of Dedication as the case may be.  The effect of this is that the CC&Rs generally no longer apply and thus homeowners are no longer subject to them.  This is another reason that it is important to give due consideration to the impact of a dissolution of the homeowners’ association.  It is very likely that dissolving the association and having a series of properties no longer subject to CC&Rs can adversely impact property values within such HOA Communities.

In conclusion, dissolution of an HOA or Community Association is a complex and difficult process and generally is one that should be avoided whenever possible.  The long term impact on property values and the relationship amongst property owners within the HOA are substantial and must be taken into account before embarking on such a path.